Shades Of A Stock Market Mania

The following is commentary that originally appeared at Treasure
Chests for the benefit of subscribers on Thursday, April
15th, 2010.

In the pushing it to the limit department, as some of you may know, I am caring
for an aging parent right now (and experiencing rapid mental decay), and yesterday
was one of those days that commanded all my time until the wee hours of the
morning here. Thusly, this will be short, but sweet. And this is quite possibly
the sweetest shorting opportunity in stocks since the tops in either 2000 or
2007, as key measures are indicating we definitely have 'shades of a stock
market mania' that in fact go beyond the two tops witnessed last decade. Let
me explain as succinctly as possible in an attempt to get this out to you before
trade begins in North America this morning.

As anticipated earlier in the week, and before, stocks remain buoyant into
options expiry tomorrow, with recently rising US index open interest put /
call ratios providing the fuel for the present short squeeze, which is going
quite manic (extreme, choppy, unpredictable) indeed with the S&P 500 (SPX)
comfortably over 1200 now. And you know what, this might not be 'the top' for
the larger reaction higher off the 2009 lows either, where as mentioned previously,
the news is just so bad out there, that increasing numbers of straightforward
thinking speculators not familiar with how these things work have been in shorting
stocks for some time already, providing the fuel to take us to this point,
which may persist. The key then, in terms identifying a profound top, is measuring
the exhaustion point of the fuel for the squeeze, these unaware speculators,
which we of course have done accurately by monitoring sentiment via US index
open interest put / call ratios.

In spite of the fact next week is the first week in an extended options cycle
(5-weeks) during May, which can have an impact on how the month matures, still,
after tomorrow, bulls and price managers alike will not have the rubes presently
caught in the squeeze to prey on anymore, with the influence of the next options
cycle weakest, so stocks should fall next week no matter what, even if such
weakness proves only temporary. How this turns out depends on whether the unaware
speculators mentioned above react moving forward, whether this squeeze is enough
for them, where open interest put / call ratios will trend lower, or whether
they continue to view the stakes being 'so high', they need to lose more money
on a collective basis in order to be able to sleep at night. Again, we will
be sure to keep you abreast of the post expiry ratios next week, and past,
in continuously gauging effective sentiment and the potential for profitable
short selling probabilities moving forward.

And again, in this regard, because we are hitting such an obvious extreme
running into expiry tomorrow, even if unsuspecting short sellers return in
May, next week should see a reaction lower in stocks, which could be the beginning
of something considerable in scale if the bears are exhausted. It's important
to understand we are approaching a point where the bears will simply be so
exhausted from the trade that they will literally be thinking they need to
take the summer off to recoup, and stop buying puts. So if this doesn't happen
in May, it will definitely occur in June once the weather in Northern longitudes
turns warmer, melting exhausted bear's resolve. And that's all the market will
need to finally start heading lower in earnest. The market will never pay the
majority - only the well studied and vigilant.

In using technical analysis to aid us further here, again we bring in the
CBOE Volatility Index (VIX), that is understandably running some serious divergences
given the degree of mania presently gripping the market, undoubtedly one of
the more profound extremes ever witnessed in the history of financial markets.
As you can see below, at present, we are witnessing the VIX exceed standard
Bollinger Band (BB) parameters, which has historically signaled an impending
turn in direction due to speculator capitulation. So again, even if the bears
are not finished in their losing ways, the VIX is due for at least a short-term
rally beginning next week, so traders should position themselves in knowing
this by tomorrow. (See Figure 1)

Figure 1

I will not list all the ways one can do this, with so many available (outright
short sales, puts, etc.), however for most, one of the index based ETF's is
likely best. We have a few listed
here in our Short Portfolio found in the Markets
Chest for US and Canadian accounts with updated pricing, targets, and market
dispositions. You will note we are now officially bearish across the board
from short-term to long. This is of course not a difficult call now given what
has happened. Never the less it's still profound given we avoided being squeezed,
along with the fact we are at a significant Princeton Economics Pi
turn window, adding to timing importance / degree. What's more, the following
chart adds to degree in my opinion as well, which will be explained below.
(See Figure 2)

Figure 2

What is the significance of the above chart? Firstly, one must appreciate
where Goldman Sachs (GS) fits into the big picture, being the quintessential
financial stock to own for a decade as measured by it's increasing out-performance
over the past ten years. And it's no secret why this has been the case, having
ex-employees taking such lofty official positions around the world throughout
this period as a matter of corporate strategy, typified by Paulson as US Treasury
Secretary last year, in charge of steering the bailouts to ensure his brethren
remained whole. What's more, because GS is not just any financial, but also
a hedge fund conglomerate and bank all rolled into one, again, it's the quintessential
financial, meaning it's essentially a measure of the health of the whole (market).

So, the fact it hit a Fibonacci (Fib) signatured resonance related target
ahead of a top in the broad market(s) cannot be taken lightly, where in fact
inquiring minds would consider this divergence telling. And while such an occurrence
could be accounted for in GS falling out of most favored status with their
buddies in Washington due to political necessity now that the public has had
enough of this self-serving horse pucky, given the totality of the situation,
with the present mania center stage, such thinking could prove dangerous if
one is thinking The Boys From Brazil (the GS boys and girls), will ever regain
such favor. And if they don't, which is likely, the fact this quintessential
financial is essentially done should not be taken lightly, providing further
profound proof of potentially significant trouble in stocks - dead ahead.

Unfortunately we cannot carry on past this point, as the remainder of this
analysis is reserved for our subscribers. Of course if the above is the kind
of analysis you are looking for this is easily remedied by visiting our web
site to discover more about how our service can help you in not only this
regard, but also in achieving your financial goals. As you will find, our recently
reconstructed site includes such improvements as automated subscriptions, improvements
to trend identifying / professionally annotated charts, to the more detailed
quote pages exclusively designed for independent investors who like to
stay on top of things. Here, in addition to improving our advisory service,
our aim is to also provide a resource center, one where you have access to
well presented 'key' information concerning the markets we cover.

And if you are interested in finding out more about how our advisory service
would have kept you on the right side of the equity and precious metals markets
these past years, please take some time to review a publicly available and
extensive archive located
here, where you will find our track record speaks for itself.

Naturally if you have any questions, comments, or criticisms regarding the
above, please feel free to drop
us a line. We very much enjoy hearing from you on these matters.

Treasure Chests is a market timing service specializing
in value-based position trading in the precious metals and equity markets with
an orientation geared to identifying intermediate-term swing trading opportunities.
Specific opportunities are identified utilizing a combination of fundamental,
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